Capital Loss Harvesting

[scubadog]

Hi friends,

I'm trying to figure out how much of my losses to harvest from my brokerage against the uncertainty of inflation.

I have ~18k in capital losses available to harvest.
I know I can write off 3k in losses every year as the limit, and intend to hit FIRE next year ish and start my roth ladder conversion.

If I sell all 18k and take 18k in losses locked in now, that sets me up for 6 years of write offs. But, it also means locking in that value as it exists today, facing uncertainty on both inflation (and the change to the value of that 3k per year) and market rises or falls. 6 years is a long window for speculation.

Of course I acknowledge the irony of asking for advise on inflation and market speculation. All the same, I'm inexperienced, so still looking for any opinions or other things to think about.

Also, if I've neglected to provide some important numbers to evaluate this, let me know!

Thanks!

[jim555]

Can't you buy something similar at the same time you sell?  As long as it isn't "substantially identical" you are good.  IRS doesn't define "substantially identical".

[scubadog]

Can't you buy something similar at the same time you sell?  As long as it isn't "substantially identical" you are good.  IRS doesn't define "substantially identical".

For sure I can! I'd also considered which fund to move into that wasn't substantially identical as well, so I have that ready.
But I'm really stuck on how much of this 18k to do it with.

[MDM]

What do see as a downside to harvesting the full $18K tax loss now?

[scubadog]

What do see as a downside to harvesting the full $18K tax loss now?

changes my starting point for capital gains. so if i harvested all 18k now my new 'principle' becomes that 18k below my actual principle. then any increase in value from that point upward are gains. facing uncertainty with inflation and market movements, i dont know if that's an issue or not to anticipate.
trying to articulate it better:
lets say i have $100k and it drops in value to 50k. running 3 scenarios then maybe my conundrum will come through (i hope!):
1. i harvest the whole 50k in losses. my new 'principle' in the gains tax sense is 50k (though i could write off 3k per year for the next 16 years), but if a year after i harvest those losses i regain up to 75k, i have 25k in capital gains to answer for, only 3k of which i can write off for the year. sure, when i harvest the gains i am 25k 'richer' in the principle sense, but that's a chunk of tax to answer for which my write offs arent helping to offset much. if the markets flatline for a few years instead of going up 25k, let's just say the value hovers around 50k, i am not really 'worse off' in the material sense either way but can write off 3k every year all the same. its really just in the case of gains that 'changing my principle' via harvesting everything now seems debtrimental... unless i'm missing something!
2. i harvest 25k, not the full 50k in losses. i'm less impacted if gains happen, since my unharvested gains are coming closer to their original value, and the punishment i'd incur on my 25k isn't all of my 50k from scenario 1, so taxes on those gains wouldnt be as bad. however, i'm maybe risking it a little more by assuming my unharvested losses will come back to their original value and beyond in a beneficial timeframe. so maybe while this one seemed on the onset (to me) like the happy medium, it may contain more assumptions or risk? not to mention, i can only write off 3k for 8 years instead of 16. though, imagining in time horizons of near or actual decades, the chances of having another year where i incur losses seems likely anyway.
3. i harvest none of the losses. no write offs, but also no chance of being punished for gains, because as my 50k inches back up to my 100k principle, none of the regaining of lost ground counts as capital gains. dont really think this is a good option, because the ability to write off losses, even if only 3k, is nice. especially for the extra padding it affords me for the roth ladder conversion.

sorry mustachians, i'm very far from a pro. probably making an elementary mistake or assumption here.

[MDM]

lets say i have $100k and it drops in value to 50k. running 3 scenarios then maybe my conundrum will come through (i hope!):
1. i harvest the whole 50k in losses. my new 'principle' in the gains tax sense is 50k (though i could write off 3k per year for the next 16 years), but if a year after i harvest those losses i regain up to 75k, i have 25k in capital gains to answer for, only 3k of which i can write off for the year.

We can stop here.  The $3K/yr limit applies only to subtractions against ordinary income (wages, interest, etc.).  A capital loss carryover is first applied to any capital gain.  In this example, none of the $25K in capital gains would be taxed because $25K of your $50K capital loss carryover would be used to offset it.

See Schedule D, especially lines 6&7 and 14&15.

[tawyer]

probably making an elementary mistake or assumption here.

Based upon what you have written, I think that you are:

I know I can write off 3k in losses every year as the limit

This $3K annual limit is for Capital Losses against Earned Income (salary), NOT Capital Gains. Long term capital gains are taxed at a lower rate than earned income. So it's good to accumulate Capital Losses in down markets to use in later years when markets are up, so that you can always take advantage of the tax deduction.

Even if you don't use these capital losses before retirement (as you indicate you will next year), you can offset as much capital gains as you like in a single year with your capital losses. In your first example, you are not limited to writing off only $3K, but the entire $25K, with another $25K of losses carried over to the next year.

[scubadog]

well that's a relief! thank you MDM and tawyer. i'm glad it was just a misunderstanding on my part! will be harvesting all my losses then ;)